In Property Investment, How Should You Treat Repairs and Maintenance From a Tax Perspective?
If you are new to the property investment world and have just purchased your first rental property, you should be particularly interested in the topic of depreciation. After all, tax depreciation can sometimes make the difference between a profit and a loss when it comes to such a property. You must ensure that you make the correct deductions when you send in your returns. But this subject can be quite complex, especially when it comes to the difference between repairs and maintenance. What do you need to know about the technicalities here to avoid making any mistakes?
Understanding the Difference
From time to time, you may need to carry out certain work on your investment property. This is to be expected, and you can account for these costs as a legitimate expense to reduce your tax burden. Nevertheless, there's a big difference between repairs and maintenance and how you handle those expenses.
Repairs and Restoration
The tax authority classifies a repair as something you will perform to restore your asset to its original condition. So, if you needed to touch up some of the paint as an outgoing tenant had scratched it while moving furniture, this is considered a repair. You need to carry out this work to restore the property to a rentable condition, and you can include the cost associated with your annual return.
Capital Improvements
However, if you need to completely repaint the property you just bought before it is in a condition to rent, this is not classified as a repair or a restoration. Instead, the ATO considers it to be a capital improvement, and you're not allowed to claim all the costs in that tax year. Instead, you will have to depreciate the cost over a number of years using a specific formula, which can vary according to whether it's a commercial or residential property.
Getting It Wrong
This is just one area where people trip up when they are new to the industry and trying to maximise their depreciation benefits. Yet the tax authority may look at your return very keenly to look for errors such as this. If they find any miscalculations, you may have to pay the penalty.
Soliciting Professional Help
So, get in touch with an accountant specialising in depreciation and property management. They'll ensure that you make the right decisions and help you craft your tax return without any errors.
Contact a service provider to learn more about tax depreciation reports.
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